The European Central Bank left ultra-loose monetary policy unchanged on Thursday but kept the door open to more stimulus in December, firmly shooting down any talk of tapering its 1.7 trillion euro asset-buying programme.
Offering few clues to the euro zone central bank’s next move, ECB President Mario Draghi left a wide range of options on the table and emphasized that a long-awaited rise in inflation is predicated on “very substantial” monetary accommodation.
Struggling to stave off deflation, the ECB has provided unprecedented stimulus for years. It has cut rates into negative territory, buys 80 billion euros worth of bonds each month and has offered banks free loans, all with the aim of boosting inflation back to the ECB’s target of just under 2 percent.
In a possible argument for even more easing, Draghi warned on Thursday that an expected rise in inflation in the coming month would be driven mostly by the fading effect of past oil price falls, raising doubts whether it will be sustainable.
“There are no signs yet of a convincing upward trend in underlying inflation,” Draghi told a news conference.
But he also said that any decision about the ECB’s policy stance would be left until December, when the bank would have to decide whether to extend its bond buys, now due to end in March.
“Sometimes it’s also important to say what we did not discuss. And we didn’t discuss tapering or the intended horizon of our asset purchase programme,” Draghi said.
In what may be seen as a de facto commitment to some form of extension of asset purchases, known as quantitative easing, or QE, Draghi also said that the programme would not end abruptly when the time comes and would be gradually wound down.
“My perception is that a sudden stop as outlined before is not … present in anybody’s mind, it’s not something that people naturally contemplate,” he said, calling a sudden end “unlikely”.
The euro initially rose 0.5 percent to $1.1040 on Draghi’s comments that an extension was not discussed but eased back to a four-month low of $1.0921 as markets are increasingly pricing in more easing.
An overwhelming majority of analysts polled by Reuters expect a three- to six-month extension of the bond-buying scheme in December but they also see no more rate cuts, with policy firmly focussed on unconventional measures.
Confirming the unanimous expectation of economists in a Reuters poll, the ECB kept the deposit rate at minus 0.4 percent on Thursday and maintained its guidance for rates to stay at their current or lower levels for an extended period.
“In our view, the ECB is not yet ready to extend QE. The recovery of the euro zone economy is not weak enough to justify more stimulus but also not strong enough to light-heartedly talk about tapering,” ING economist Carsten Brzeski said. “This is why the ECB is simply buying time.
“Mario Draghi’s elegant balancing between tapering and an extension of QE keeps all expectations alive and could have one welcome fall-out: slightly higher long-term rates which will bring some relief to the scarcity problem without panic.”
German 10-year yields, in negative territory for most of the summer, held just above zero on Thursday, with bond yields falling across much of the euro zone’s periphery.
Any meaningful extension of asset buys will require the ECB to modify some of the programme’s technical constraints to counter the scarcity of some assets, like German Bunds.
“If, as we expect, the ECB extends QE by nine months, we estimate that under the current regulations it would by early summer 2017 no longer be able to find sufficient Bunds suitable for purchase,” Commerzbank analysts said in a note.
“Consequently in December the Bank will have no choice but to change the rules of the programme.”
Changes could include relaxing self-imposed constraints like the rule prohibiting the ECB from buying assets that yield less than its deposit rate, or the rule requiring it to buy assets in proportion to each country’s shareholding in the ECB.
Draghi has some time to play with, as the euro zone economy is chugging along, inflation is at a two-year high and national budget proposals suggest a bit more fiscal support. The early impact on euro zone economies of Britain’s vote in June to leave the European Union has meanwhile been muted.
Wage growth remains weak, however, while core inflation is stuck below 1 percent and unemployment is high, suggesting that inflationary pressures remain feeble.
Lending growth is also showing signs of levelling off, suggesting that banks may be struggling to pass on some of the ECB’s ultra-loose policy measures.
Draghi reaffirmed repeated calls to euro zone governments to support ECB policy with pro-growth fiscal measures and structural reforms, adding the focus should be on action to raise productivity and improve the business environment.
Source: Reuters (By Francesco Canepa and Balazs Koranyi, Writing by Mark John; Editing by Catherine Evans)